How Does Financial Misreporting Impact Borrower Reputation?

Press release from the Scheller College of Business:

02-14-2019

Authors
Sudheer Chava, Georgia Institute of Technology Kershen Huang, Nova Southeastern University Shane A. Johnson, Texas A&M University
Research Questions Addressed
How does deliberate financial misreporting impact a firm’s reputation and its ability to secure low-cost loans? How long does it take a firm to rebuild its reputation following an act of deliberate misreporting? Does additional effort improve a firm’s ability to restore its reputation after misreporting?
Primary Findings
Firms that deliberately misreport financial information pay significantly higher interest rates than firms that truthfully report their finances. Higher interest rates for misreporting firms are maintained for at least six years after the misreporting is identified. Furthermore, the interest rate premium paid by misreporting firms does not decrease over that same period. Actions that misreporting firms take to restore their reputation do not result in a decrease in the interest rate premium.

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RELATED LINKS

• Chava, S. (2014). Environmental Externalities and Cost of Capital. Management Science, 60(9), 2223-2247.
• Liang, Y., Marinovic, I., & Varas, F. (2018). The credibility of financial reporting: A reputation-based approach. The Accounting Review, 93(1), 317-333.

This press release was produced by the Scheller College of Business. The views expressed here are the author’s own.